Kindle Version Available

Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:

http://amzn.to/2GF2E8W

 

2018 Changes to Nonprofit Reporting

Financial statements of nonprofits will look at bit different in 2018. The changes may not be that noticeable to the untrained eye, but they will happen due to FASB (Financial Accounting Standards Board) attempt to make financial reporting easier to understand. Even though current reporting rules have been in place for over 20 years, many people have complained that the financial statements of nonprofits are confusing not providing enough information to assess liquidity and ability to pay bills. This update, known as ASU 2016-14, focuses on these concerns.

“Not-for-profit organizations that will be affected include charities, foundations, colleges and universities, health care providers, religious organizations, trade associations, and cultural institutions, among others” (FASB.org)

The main changes regarding this accounting update are:

Only two classes of net assets

As you may know, net assets are elements that hold information about nonprofits, accumulating increases and decreases in revenues and expenses throughout the years. A nonprofit account always belongs to a net asset, traditionally classified as unrestricted, temporarily and permanently restricted. No more. After this update, we will have only two classifications of net assets:

1-Net Assets Without Donor Restrictions, comparable to the “old” unrestricted net asset
2-Net Assets With Donor Restrictions, combining the “old” temporarily restricted and permanently restricted net assets.

So, instead of reporting on three net assets, as has been the case until now, with statements showing three columns or lines, there will be only two net assets.  It doesn’t mean that the accounting of temporarily and permanently restricted net assets need to change internally, but these are now combined in the “official” financial statements.  Most likely, the reporting on the accounting software will need to be modified to accommodate the update requirements.

Underwater value of endowments 

Organizations may receive endowment funds that are held for long-term or perpetuity. When the fair market value of such investments is lower than the original value of the gifts, they are said to be “underwater.” Unfortunately, that has been the case with the volatility of the stock market and other losses. Currently, such losses are reported under the unrestricted net assets area. However, after this update, accumulated losses are to be shown within the endowment fund — net assets with donor restrictions.

Detailed information about endowments is also required as disclosures on the official financial statements, such as the current fair market value of the endowment, any amount required to be maintained, and any deficiencies of the underwater endowment fund.

Liquidity

Liquidity is the ability of a nonprofit to pay its bills, a valid concern to many donors and grantors. As many donors restrict gifts, it can be hard to determine if an organization has the money necessary to pay its current bills. Financial flexibility is essential for any nonprofit to be viable long-term, so this update requires disclosures about how an organization will be able to meet its financial obligations for the next 12 months. Specific resources available should be disclosed, such as prior year’s reserves and any money restricted by the board.

For more information, check out the book “Nonprofit Finance: A Practical Guide –  Second Edition”

Practical Online CPE Courses

If you need CPE classes as a CPA or other financial professional, you may like my online self-study courses offered by many providers, including:

Financial Statements of Nonprofits are Different  — CCH- Wolters Kluwer

Nonprofit Finance: A Practical Guide — CCH- Wolters Kluwer

Ethics for Enrolled Agents– CPE Depot

Tips on Becoming a Great Consultant- CPE247 — used as training book on CPA and consulting firm.

You can also check out my books:

Nonprofit Finance: A Practical Guide — Nominated for a  2016 McAdam Book Award

15 Quick Tips on Becoming a Great Consultant  — Free on Kindle Unlimited

 

 

Grant Management Ideas

When a nonprofit receives grants, either from government entities or foundations, management needs to keep records well organized for questions or reviews. This can be tricky in the case of multiple funders with their own reporting and compliance issues. Even smaller funders may want to know what happened to their money and require some reporting, even if informal.  Showing disorganization and lack of controls may discourage donors to keep on giving, spelling disaster to nonprofits.

Below are some ideas that are likely to help you in this process.

  • Set up a summary sheet for each grant with reporting dates and other crucial information, such as education requirement of staff covered on each grant that is updated for each new grant and is reviewed every week to make sure nothing falls through the cracks. This could be done on paper or online, but make sure others within the organization have access to this information easily in case people go on vacations or leave the nonprofit. A template could be created so that all summary sheets look alike, making it easy to find information.
  • Make sure the accounting system captures revenues and expenses on each grant. You could identify grants through the chart of accounts by reserving a couple of digits towards specific grants or through “classes” or another method specific to your software. You may also need to train your accounts receivable and payable staff to recognize grant funds coming in and out, so they can code them properly. If not, you will have a nightmarish time providing reports to grantors and other interested parties.
  • Develop a good filing system. Be sure to download and print all OMB Circulars and other documentation relevant to grant control, including notes on meetings and phone conversations. Keep them filed and accessible at all times. You can make a summary listing of all non-allowable costs that you are likely to have and keep it handy.
  • Establish a budget for the organization based on grant budgets. Every grant-funded project should have its own budget numbers entered in your accounting system.
  • Review reports on each project monthly to identify errors and monitor financial compliance.  The Board and upper management usually receive summary reports, but other managers should review financial reports by grant source.
  • Review documentation on journal entries, accounting entries, associated with grants. Each expense and revenue should be justified with proper documentation. If you see a number that doesn’t make sense, ask to see the backup paperwork related to the number.

 

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award

 

Accounting Helping You?

“Business is great” is not as effective as “Business has had sales of $10,000 per month,” and you presenting a financial report with the numbers on it. The more precise you are, the more credibility you have. And to be precise, you need a way to compile, classify data — that’s the role of accounting in businesses, including nonprofits.

Without accounting, you really don’t know if your business is doing well, and you cannot answer simple questions, such as how much you paid for office supplies this year. If you’re small, you may get away by using your checkbook as an accounting system, but as you grow, you will see how hard it can be to control expenses and analyze transactions without a more formalized system.  Accounting software is so affordable and easy to use now that it makes little sense to be operating in the dark — without proper financial information.

Below are some compelling reasons to employ some form of accounting:

Objectivity:

Accounting is objective, rational, unbiased with no feelings attached to it. That’s why it’s so valued by managers who want data that is real and not based on gossips or recollections. Since these numbers are backed up by documentation, oftentimes the accounting department becomes the go-to place for many areas within a business. Of course, we have accounting fraud and bad accountants that make up numbers, but overall, if you have a well-run accounting department with proper controls, the information is good and reliable.

Accuracy:

The more accurate the information, the better off you are. It may not be 100%, but often financial reports can be relied upon for management to make decisions and plan for the future. You may have good intuition and make decisions based on that, but having something to validate someone’s intuition doesn’t hurt. For example, if you thought you had a great month and received about $100,000 in revenues, but the accounting system tells you that you made only $30,000, then you may need to re-think your estimation or look for reasons why the accounting system shows such a low number — it could be something you didn’t consider.

Organization:

Managers often use accounting to find specific information. Accounting organizes data so that it can be found easily. For example, if you want to find how much you spent on food for a program, you can go to a food account and see all food expenses there, organized. Because of accounting, all relevant data is in one place, in a certain order. Without an accounting system, you will need to look for paper docs, add them up and maybe miss a couple of those, making this task clumsy and ineffective.

Many people are scared of accounting, assuming it’s difficult and cumbersome.  But in reality, it‘s not.  Many popular programs, such as QuickBooks and PeachTree, have free online tutorials and help groups, making accounting accessible to many people with no accounting background. From experience, often the accounting system becomes the main information system of an organization with people relying on it for other functions, such as a customer service or membership information. Because of this need, many accounting systems offer other modules or add-ons to gather information besides financial data.

Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.